Tuesday, 5 November 2013

Rise of the fake brands

A KPMG report published yesterday showed how the black market for tobacco in Australia has changed since plain packaging came in. At a basic level, the key point is that the illicit market has increased in size since 2012 and the Aussie government is said to be losing $1 billion in tobacco duty. It also estimates that there has been no decline (or rise) in tobacco consumption in 2013. None of this is actually big news. Previous research has found an increase in the illicit trade and it stands to reason that the government loses tax revenue whenever the shadow economy gets larger.

The more interesting aspect of the report is the way in which the black market is changing. Traditionally, the antipodean illicit tobacco trade revolves around smuggled cigarettes and 'chop chop' - bags of loose tobacco for hand-rolling. According to KPMG, sales of chop chop declined by 40 per cent in 2013, but this was more than compensated by a rise of 154 per cent in the sale of manufactured 'illicit whites' - ie. ready-rolled cigarettes that either imitate existing brands (counterfeit) or are completely fake brands.

For example, there is now a brand called Manchester in Australia that has a 1.4 per cent market share. Not bad for a brand that is illegal and competely fake. There has never been a legitimate brand called Manchester.

This raises the question of why counterfeiters are creating fake brands rather than imitating existing brands. Perhaps it is because smokers do not like the plain packs - no one denies that they are unattractive - and prefer to have something that is more old school. Perhaps there is some kudos is buying a brand that is patently illegal. Perhaps smokers are sticking two fingers up to the public health zealots.

Whatever the reason, the decline of chop chop and the rise of the fake brands suggest that the illicit trade is changing in ways that cannot be explained by high taxes alone (although the report notes that the price of contraband tobacco has risen by 29 per cent since March 2010, thereby giving further incentives to smugglers and counterfeiters). The Manchester brand wasn't entirely unknown before plain packaging came in - it had a 0.3 per cent share in 2012 - but it has grown at an uncanny pace since.

The report received a fair amount of coverage in Australia, but the only newspaper to cover it in Britain was The Guardianwho effectively dismissed all its findings on the basis that the tobacco industry had commissioned it. The obvious implication is that KPMG are liars and fraudsters who make up numbers to suit their clients. If that is what they believe, they should have the cojones to say so. If not, they should accept the findings or show us where the flaws lie.

Coffin-dodging sociologist Simon Chapman had another senior moment as he attempted to do the latter. Amongst the research methods used by KPMG was collecting discarded cigarette packs to see how many were illicit.

Simon Chapman, a professor of public health at Sydney University, says the methodology the report has used for this finding is flawed. “There would be hundreds of thousands of tourists who would come to Australia every year who smoke and it’s only been in recent months that there have been restrictions on the number of cigarettes you can bring in duty free.

“So the idea that any cigarette that you found discarded which wasn't a plain package could have been brought in by large numbers is an obvious flaw.”

Where to begin with this drivel?

Firstly, empty pack surveys are a gold standard test for those tracking trends in illicit tobacco. They have used for many years by industry and government. They are more reliable than surveys which essentially ask people to admit to breaking the law.

Secondly, the number of tourists who bring cartons of their own cigarettes to Australia is surely very small indeed. As a proportion of smokers in this country of twenty million souls, they must make up a negligible proportion at any given time.

Thirdly, even if they didn't make up a negligible proportion, there is no reason to think that their numbers would change dramatically from year to year.

Fourthly, and most importantly, Chapman mentions that the law allows tourists to bring in no more than 50 cigarettes each. This change to the law has not taken place "in recent months" as Simple Simon disingenuously clams, but took place in September 2012 - three months before plain packaging came in. We are interested in what happened in 2013 and throughout 2013 this petty restriction was in place. Even if Chapman was right about the increased prevalence of illicit packs being the result of foreign litterbugs, limiting tourists to 50 cigarettes each would reduce - not increase - the number of packs. (For other classic Chapmanisms, see here and here.)

But never mind facts and logic, a "professor of public health" has put some words together to form a sentence and that's good enough for The Guardian (a newspaper that happily and uncritically covered a KPMG report about the living wage on Saturday). And never mind the Australian newspaper that sent a journalist out on a highly successful shopping trip for illicit smokes a few days earlier. And never mind the incredible seizure of 80 million cigarettes and 70 tonnes of rolling tobacco that took place only a couple of weeks ago.

All figments of the tobacco industry's imagination, apparently. Go back to sleep, Australia, public health professionals have got everything under control.

According to ASH, cigarette and tobacco smuggling and counterfeiting are not affected by taxes; indeed, have nothing to do with taxes.

Sooo... I predict that the next big thing is going to a huge black market in smuggled and counterfeit BROCCOLI!

Broccoli can easily be smuggled in from other countries disguised as food. Customs inspectors will never realize what's slipping past them as many of them are red/green color blind!

Counterfeit broccoli will flood the market too since broccoli is in the cabbage family and easily manufactured from leftover cabbage waste. In some cases we are likely to see the cabbage adulterated with grass clippings or perhaps even TOBACCO!

About Me

Writer and researcher at the Institute of Economic Affairs. Blogging in a personal capacity.
Author of Selfishness, Greed and Capitalism (2015), The Art of Suppression (2011), The Spirit Level Delusion (2010) and Velvet Glove, Iron Fist (2009).

"Of all tyrannies, a tyranny exercised for the good of its victims may be the most oppressive. It may be better to live under robber barons than under omnipotent moral busybodies. The robber baron's cruelty may sometimes sleep, his cupidity may at some point be satiated; but those who torment us for our own good will torment us without end, for they do so with the approval of their own conscience."